Groups have in many cases brought down their annual costs and removed performance fees, but on average open-ended funds have the edge over their closed-ended rivals from a costs perspective.
It’s not only charges that are working against trusts at the moment; the strong performance of risk-assets has pushed a number of investment trusts onto very tight discounts relative to their average and in some cases steep premiums, which puts them at a greater risk of a re-rating – particularly if markets do indeed correct.
In the first of a new series, we highlight some popular investment trusts with above average charges and suggest some cheaper open-ended alternatives – starting with UK equity sectors.
Perpetual Income & Growth IT – 1.85% OCF
CF Woodford Equity Income – 0.75% OCF
There are a number of motivations for switching out of Mark Barnett’s top-performing trust for Neil Woodford’s CF Woodford Equity Income fund.
First of all there is a massive difference in the charges structure. Barnett’s Perpetual Income & Growth IT has ongoing charges of 0.93 per cent, and if you include the 10 per cent performance fee, this figure has risen to 1.85 per cent over the last 12 months.
CF Woodford Equity Income’s annual management charge is 0.75 per cent, but the firm will absorb all fund-related expenses, meaning that the AMC and OCF will always be the same. The figure is as low as 0.65 per cent on some platforms.
Barnett’s fantastic run in recent years has pushed the trust onto a discount of just 1.1 per cent – tighter than both its one and three year average.
Performance of trust, sector and index over 3yrs
Source: FE Analytics
When a trust’s discount comes in significantly, it is more susceptible to a correction if sentiment towards it or the market in general deteriorates.
Supporters of Woodford will point to his longer track record of outperformance. There are also question marks over the vast amount of assets Barnett now runs, with some fearing that the much larger Invesco Perpetual Income and High Income funds will take up the biggest bulk of his time – especially if redemptions continue at their current rate.
CF Woodford Equity Income was only launched in mid-June so doesn’t have a track record to speak of. A number of industry experts have chosen to move their money from Barnett to Woodford, including Hargreaves Lansdown’s Mark Dampier and Whitechurch’s Ben Willis.
Investors who want to stick with Barnett may wish to consider his Invesco Perpetual Income, High Income and UK Strategic Income portfolios, which have clean ongoing charges of around 0.9 per cent.
Fidelity Special Values IT – 1.2% OCF
Fidelity Special Situations – 0.95% OCF
In the recent past, closed-ended versions of more popular open-ended funds have been highlighted as attractive alternatives for investors; however, with clean share classes and narrowing discounts both making trusts look less appealing from a valuation point of view, it’s now the funds that look a better bet in many cases.
When FE Alpha Manager Alex Wright took over the Fidelity Special Values IT in late 2012, it was on a double digit discount and was cheaper from a charges perspective than its open-ended equivalent, Fidelity Special Sits.
The tables have now turned. The Special Sits fund, which is now run by Wright as well, is cheaper by 0.25 percentage points, and the trust’s discount has come in to around 6 per cent. This figure is actually slightly wider than its one year average, though much tighter than its three year average.
Performance of fund and trust over 2yrs
Source: FE Analytics
Wright’s small-to-mid cap bias has seen the trust vastly outperform Fidelity Special Sits in recent years, but since taking over the fund he has started to increase its exposure to companies further down the market cap scale. He explained that the recent correction in the FTSE 250 and FTSE Small Cap indices has created a number of opportunities for him in a recent FE Trustnet article.
The larger size of the £2.8bn fund means that Wright will find it more difficult to be as flexible and nimble as when he’s running the £666m trust, though.
Diverse Income IT – 1.84% OCF
CF Miton UK Smaller Companies – 0.94%
The stellar run of small caps pushed a number of investment trusts close to par earlier in the year. This is in stark contrast to their three year average, which is closer to a discount of 12 per cent. The recent correction has seen discounts widen significantly, though one remains on a premium.
Gervais Williams’ Diverse Income trust sits in the IMA UK Equity Income sector, though invests in small and micro-cap companies. It is currently on a premium of 2.4 per cent, and has ongoing charges of 1.84 per cent.
Investors wary of this premium may be tempted by Williams’ CF Miton UK Smaller Companies fund – a growth-focused product that has ongoing charges of just 0.94 per cent.
It has a better record than the trust since its launch in December 2012, over which time it tops its IMA UK Smaller Companies sector, with returns of 73.37 per cent.
Performance of trust, fund and index since Dec 2012
Source: FE Analytics
Other potential alternatives to the Diverse Income Trust include Giles Hargreave’s Marlborough Multi Cap Income fund, which has ongoing charges of 0.8 per cent, as well as Old Mutual UK Smaller Companies and R&M UK Equity Smaller Companies, which have charges of 0.94 and 0.99 per cent, respectively.
Williams also runs an income-focused small cap fund in CF Miton UK Multi Cap Income, but it is now closed to new money.
